U.S. federal investigators are probing whether Morgan Stanley misled investors about mortgage derivative products it helped create and sometimes bet against, the Wall Street Journal said, citing people familiar with the matter.
Morgan Stanley arranged and marketed to investors pools of bond-related investments called collateralized debt obligations, or CDOs, and its trading desk at times placed bets that their value would fall, the Journal said citing traders.
Federal investigators are examining whether Morgan Stanley made proper representations about its roles in the mortgage derivative deals, the newspaper said.
Two particular deals — named after U.S. Presidents James Buchanan and Andrew Jackson — were scanned by the investigators, the paper said citing a person familiar with the matter.
Morgan Stanley helped design the deals and bet against them, but did not market them to clients, according to the paper.
Traders called them the “Dead Presidents” deals, the Journal said. The firm made money on the Dead President deals, but any profit was far overshadowed by the $9 billion the firm lost on bullish mortgage bets in 2007, the paper said.
“We have not been contacted by the Justice Department about the transactions being raised by The Wall Street Journal and we have no knowledge of a Justice Department investigation into these transactions,” a Morgan Stanley spokesman told the paper.
Spokespeople for the Manhattan Attorney’s office and the U.S. Securities and Exchange Commission declined to comment to the Journal.
On April 16, Goldman Sachs was charged with fraud by the U.S. Securities and Exchange Commission (SEC) over its marketing of a subprime mortgage product known as ABACUS, igniting a battle between Wall Street’s most powerful bank and the nation’s top securities regulator.
Morgan Stanley, SEC and New York Attorney’s office could not be immediately reached for comment by Reuters outside regular U.S. business hours.
